The Turnbull Government has released the “Report on Reforms for Cooperatives, Mutuals and Member-owned Firms” (Hammond Review) and stated that it supports all of its recommendations. This is good news for the mutuals sector. If the recommendations are implemented effectively then the mutuals sector should find the process of raising capital simpler, which will hopefully lead to more innovation, growth and competition.
The Hammond Review was undertaken by Mr Greg Hammond, a former partner of our firm, as part of the Government’s consultation on potential reforms to support cooperatives, mutuals and member-owned firms in Australia. Mr Hammond was appointed to review certain of the findings of the Senate Economics References Committee Report on “Cooperative, mutual and member-owned firms” which was released in March 2016. That report made 17 recommendations, and Mr Hammond was asked to consult on 3 of those recommendations, i.e.:
- Recommendation 4: that a mutual enterprise be explicitly defined in the Corporations Act 2001 (Cth) (Corporations Act) and its associated regulations
- Recommendation 16: that the Australian Prudential Regulation Authority (APRA) set a target date for the outcome of discussions with the cooperative and mutuals sector on issues of capital raising and bring those discussions to a timely conclusion
- Recommendation 17: that the Government examine proposals to amend the Corporations Act to provide cooperatives and mutuals with a mechanism to enable them access to a broader range of capital raising and investment opportunities.
The focus of the Government on these particular recommendations reflects the fact that the principal barrier to the growth of the mutuals sector is the difficulty mutually-owned firms face in raising capital without losing their mutual status.
The Hammond Review has made 11 recommendations, all of which have been supported by the Government. The recommendations are focused on the following key reform areas:
- permitting the issuance of Common Equity Tier 1 Capital (CET1) instruments directly by mutual authorised deposit-taking institutions (ADIs), mutual friendly societies and mutual private health insurers, including that APRA amends its prudential standards to permit direct issuance of CET1 and the develops standard template forms of CET1 instruments
- development of minimum service standards by APRA (for the assessment of capital instruments) and ASIC (for consideration of applications for exemption from the demutualisation provisions in the Corporations Act)
- consideration of the effectiveness of the demutualisation provisions of the Corporations Act and the Banking Act, and whether amendments may be necessary or desirable – and that the Corporations Act be amended to permit mutuals to issue capital instruments without risking their mutual structure or status (including that a definition of “mutual company” be introduced into the Corporations Act)
- the use of an offer information statement with enhanced disclosure by mutually owned ADIs for small-scale offerings of converting capital instruments
- tax regulations for Tier 2 Capital instruments convertible into CET1 instruments (so these instruments are treated in the same way as the equivalent instruments issued by non-mutual ADIs).
Apart from the fact that mutuals have for a long time been generally constrained in their ability to raise capital, there is some technical background and context to the recommendations, at least in relation to mutual ADIs.
Since January 2013, APRA has required the regulatory capital instruments of ADIs to include a “loss absorbing” mechanism by which capital instruments meeting Additional Tier 1 Capital and Tier 2 Capital requirements convert into ordinary shares of the issuer in the event of the issuer’s “non-viability”. Mutual ADIs were at a disadvantage in that they did not have ordinary share capital (because they are mutual firms and not established with the purpose of delivering financial returns to their investors) – and so they could not issue compliant converting capital instruments. In response to this, in April 2014, APRA introduced Attachment K to the relevant ADI capital adequacy prudential standard (APS 111) permitting mutual ADIs to issue a new type of CET1 instrument, known as a “mutual equity interest” (MEI), on conversion of Additional Tier 1 or Tier 2 capital instruments. This gave mutual ADIs the ability to issue capital instruments which comply with the requirements of APS 111.
However, Attachment K does not permit the direct issuance of MEIs by mutual ADIs and in any event, difficulties with the interpretation of Attachment K has complicated the process for issuance of compliant capital instruments by mutual ADIs. APRA has proposed some amendments to Attachment K in anticipation of mutual ADIs being permitted to directly issue MEIs which may simplify this process.
If implemented, the recommendations of the Hammond Review should pave the way for ease of capital raising across the mutuals sector, including by mutual ADIs, mutual friendly societies and mutual private health insurers. We welcome the recommendations of the Hammond Review and look forward to seeing the Government’s reform proposals in response.